Development Obstacles Imposed by Unwarranted Prudential Regulation

Supervision and regulation have important implications for the effectiveness of interme­diation and access to financial services, in addition to their roles in fostering stability. Entry regulation and uneven supervisory practices across different groups of financial institutions (either by type or ownership) can hamper competitiveness and, thus, effec­tiveness. Different regulatory and supervisory standards across different financial institu­tions that offer similar products and compete directly with each other can negatively affect competitiveness. Heavy regulation of branch openings (as already mentioned) or other delivery channels can limit access to financial services. For example, prudential policies should avoid undue reliance on tools that are likely to disadvantage small and new firms (such as excessive mandatory collateralization requirements for bank loans). Supervision and regulation also impose transaction costs on financial institutions and, ultimately, on the users. The benefit of regulation and supervision in terms of promoting soundness and stability must be balanced with the costs that they may impose in terms of efficiency and access. Given the high fixed-cost component of financial supervision, that balance is especially important for small financial systems and for components of finan­cial systems that are made up of small institutions, such as the cooperative movement or microfinance.